Tuesday, March 29, 2011

Home Depot Issues Debt To Buy Stock

Home Depot (HD) announced after the close yesterday that they would issue $2B in debt to refinance $1B of senior notes and to accelerate a repurchase $1B of outstanding shares. Typically we're big fans of stock buybacks and place a major emphasis on stock re purchasers via the Net Payout Yields folio. Issuing debt though to repurchase shares aren't as attractive. Its the use of free cash flow and cash on hand that makes a stock appealing not debt. When a company can afford a large percentage buyback, then it clearly signals that the market likely misunderstands a stocks future.

HD has been one of the top investments in the NPY folio for a while since they have a nice 2.8% dividend combined with a history of strong buybacks. The company has already announced the intention to buyback $2.5B of stock this year placing the buyback yield at roughly 4% for this $61B market cap stock. Combined with the dividend, HD has a NPY of nearly 7% making them very attractive.

This debt enhanced buyback technically increases the yield by another 1.6%, but we're actually inclined to exclude increased debt from our focus.

Clearly management has seen a turn in the business with 2010 seeing the first increase in sales since 2006. Likely they are looking out to 2013-14 and seeing a booming house building market and much higher interest rates. Why not borrow money today at low rates and buyback stock before it jumps higher?
It might be a savvy decision, but it ultimately adds unnecessary risk. The cash will be forever gone, but the debt will remain requiring interest payments.

Wise or not, the move doesn't appeal to our portfolio that focuses on the combination of repurchases and dividends.

Via HD PR:


  • today announced the pricing of a $2 billion senior note issuance.  Net proceeds from the financing will be used to refinance $1 billion of senior notes that came due in March 2011 and to repurchase $1 billion of outstanding shares through an accelerated share repurchase program with Barclays Capital.  
  • The accelerated share repurchase is in addition to the Company's previously announced intention to repurchase approximately $2.5 billion of outstanding shares throughout 2011 using excess cash generated by the business. 
  • In February 2011, the Company announced a six percent increase in its quarterly cash dividend to 25 centsper share.  
  • The Company launched its stock repurchase program in 2002 and cumulatively through the end of fiscal 2010 had purchased approximately $30.1 billion of its outstanding common stock.  As of the end of fiscal 2010, the Company had $9.9 billion remaining in its share repurchase authorization.  

Disclosure: Long HD in client and personal accounts. Please review disclaimer page. 

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